Ask The Expert - Andrew Maguire - July 2020​

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Craig: Greetings once again from Sprott Money News at sprottmoney.com. It's the month of July 2020, and it's time for your "Ask The Expert" segment. I'm your host, Craig Hemke. And joining us this month is legendary precious metals trader and analyst, Andrew Maguire. Many of you are familiar with Andy, all of the work he's done over the years, helping us to find a more fair and free pricing system. We're all in his debt. And we're also in his debt for sharing some of his time with us today. Andy, thank you so much for joining us here at Sprott Money.

Andy: Oh, Craig, it's really great to be with you. And before we start, I know you've got a bunch of questions. I just wanted to say very quickly how much I respect, and how much respect I have for Eric. He is the man of the highest integrity, and he's been a major influence for me and so many people I meet. He's done a lot to educate gold and silver investors, not just in what we see him doing publicly, but also all the support he gives behind the scenes, supporting the likes of GATA, and the industry. So, I had to say that.

Craig: Well, I'm sure he appreciates it, and I know everybody at Sprott Money does as well. It is remarkable. I feel so blessed that I get to speak with him every week. Here on the Sprott Money site, if you head to sprottmoney.com, you'll find a tab in the navigation bar called "Insights." There you find, obviously, not only these "Ask The Expert" segments, but our "Weekly Wrap Up." Every single Friday, I get the pleasure to visit with Eric about precious metals events, and mining shares, that have taken place in the previous week. So be sure to look for that at sprottmoney.com every Friday.

And also, while you're there, don't forget to check out our inventory. Given the buzz around rising gold and silver prices, at Sprott Money, we've got a number of gold and silver products that you can invest in. Lot of talk out there right now about this being just the beginning of an upward swing. So if you have any questions, or you wish to purchase through our sales reps, again, just sprottmoney.com, or give us a call at 888-861-0775. We've been collecting questions for Andy, both through email and through Twitter. And Andy, I've got seven questions for you from regular listeners and Sprott Money customers. If you like, can we get started?

Andy: Go for it. Let's go for it.

Craig: I have a sneaky feeling this first one is right in your wheelhouse. "We've been watching, this year, the gold-silver ratio go to historic extremes, 120-plus, and now it's falling sharply here in the middle of July. In your view, why does the gold-silver ratio persist at such historic extremes?"

Andy: Well, Craig, the ratio trade, that has persisted at untenable levels. Now, we've talked about this before, but it's for the sole reason that the paper market tail was wagging the physical dog. And in fact, it was when this ratio reached 125 to 1 in March, now note the timing, just two sessions later, the entire paper sham imploded on March the 23rd. Now, in retrospect, and as sanity gets restored, this ratio, obviously it's gotta revert back to its historical levels at 16 to 1, which I think is a fair assessment. Some people say 12, some people will say 15, but around that level. But right now, and I think this is the question that comes up in most people's minds is right now, where do we see this going? It's collapsing from 125 to 1? And basically, I see it pausing at 63 to 1, followed by 32 to 1. And this is after discussions with multiple liquidity providers who we think that that is probably realistic levels. That's just before the real supply-demand metrics restore the true balance. So, I would just knock this question right back to the smart guy that asked it. Where does that put the price of silver? I'm gonna let you do that sum.

Craig: Get out the calculator. You don't even need the calculator for that one, Andy. We go back to 30 to 1, I think people can figure that the silver price is gonna be a little higher than it is today. That leads us, I guess, to question number two, and this might be someone from my site, TF Metals Report, because I remember you mentioning this back around the 1st of May. The question is, "Earlier this year, you mentioned a possible new contract on the LME that would be designed to compete with the COMEX. Do you have an update?"

Andy: Yeah, a really great question. And as you say, we broke this news a couple of months ago, wasn't it? And that was just, in fact, it was wasn't long after the paper market sham blew up on March 23rd. And really, what raised this was the need, and bear in mind, we're in the wholesale business, and we saw a lot of people suffering here from the blow-up, and what, the requirement for a real physical hedging solution. And it's most definitely now on the front burner. And as we discussed back then, the only real open interest trading on the COMEX, prior to the paper market blowing up, was legitimate hedging transactions, primarily relating to the much larger over-the-counter and physical positions, which were centered around the second-tier trading and bullion banks, who were then hung out to drive when the EFP conduit blew up, the exchange for physical conduit blew up.

Since then, we've witnessed an exodus of these traders, and you've seen it yourself. I mean, so really, what's that doing? Massive paper-centric fraud. So this leaves really algo battling algo, but ultimately, disciplined now, for the first time, by the fact that the paper price will be demanded for T plus 2 delivery in the over-the-counter market. So, to answer the question, there is a massive demand for a physical solution. And it's gonna protect the legitimate hedges from paper-centric counterparty risks. Now, where there is a need, there is a way, and I see this as a timing-wise, lightly taking to September, probably mid-September, before sufficient liquidity providers are on board and systems are in place to provide the solution.

And I really would like to expand more on this. But to do so would not be really 100% a good idea at this point, but I can guarantee the solution is coming. And really, it's a question now... You know, the LME needs to be trading 23 hours, 24 hours a day. Right now, there's only a period of this session that is electronic. The rest of it's by phone. Then obviously, that will tell you that there is a major exchange now interested in connecting with the LME, and that's what's underway at the moment.

Craig: Do you think, Andy, that's related...? I mean, it seems to be, related to, you know, this surge of gold that's allegedly flown into the COMEX vaults. It seems as if the CME has converted the COMEX into some type of physical delivery vehicle. Is it in response to what the market is demanding and them sensing this competition?

Andy: That sure is backfiring on them. Yeah, as we know, Craig, you're right. And I know you talk a lot about this, that we suddenly see this inflow, see this desperate, I'll call it a desperate attempt for the CME to actually try and provide this illusion that they're now, the COMEX, is a physical exchange. Well, okay, so that's a different question altogether. But we all know that is absolute farce. And what's happened is it's backfired, because this bullion and if, whatever it is, whether this is rehypothecated or not, I'll leave it for people to decide. But this bullion that is sitting there is being drained right back into London, and Europe.

Craig: Yeah, yeah. And, again, the record COMEX deliveries, I mean, it's just mind-blowing. I'm sure you've seen them. All right, Andy, let's move on to question number three, which is, "How would the mining shares and the mining companies benefit if gold and silver were transacted using blockchain technology?" Meaning, I guess if we were to get away from the whole futures contract, you know, the tail wagging the spot dog.

Andy: Absolutely. Now, we're talking about really digitizing gold, physical gold, and putting it on the blockchain rails. Now, so yeah, in answer, as long as you can get determined it is one-to-one physical, and fully allocated in the name of the user, this will go in a huge way to ending the paper gold sham. Now, clearly, the trustless blockchain rails become the perfect solution to digitize physical gold into small enough amounts where it can actually be used as an everyday currency. Now, digital gold becomes really a fellow traveler with the likes of Bitcoin. And the demand for physical gold will exponentially increase as more and more people adopt this. And, you know, really, blockchain technology will kill the paper gold game.

It can only be good for all gold and silver investors, but also, on the right platform, producers can directly access the precious metals markets, cutting out a great deal of friction. And they become price setters, not takers. Now, that turns the whole insider run, daily fixes, into a 24-hour market, and as liquidity flows into digital gold, the need for a twice-daily fix suddenly evaporates. Now, most people will know it's the fixes where the market manipulation leads provided to the DOJ focused on the fix being pre-determined at a future date now, usually 24 hours later. But there's one other benefit. Each gram of gold entering the blockchain can be tracked from mine to refiner to end-user. Now, this ensures the integrity of the entire chain, eliminates blood gold, and ensures a fairer deal for everyone.

Craig: Yeah. Yeah. Let's, I guess, follow on then with question number four, because this kind of connects to what you were just mentioning. And question number four is, "With paper and physical price disconnecting," and boy, did we ever see that back in March, when COMEX silver got to $12, but you couldn't buy it anywhere for less than $24 retail, but "with that disconnect, what purpose eventually does paper gold even serve?"

Andy: Well actually, there is... And the thing is that we all, you know, as I say, as a wholesaler, as a dealer, I think really, one has to understand that paper gold at around 6 to 1 ratio, actually that would be acceptable, that there are legitimate reasons for some paper gold transactions to exist, however, not in the manner it's currently traded. Now, we've got, see, jewelers, refiners, producers, etc., require the use of paper gold as bullion is processed, but it would have to be traded transparently between counterparties in a regulated marketplace, not the unregulated smoke and mirrors world of the COMEX and the over-the-counter markets. So, to answer the question, yeah, I can see a regulated use for it.

Craig: So maybe a contract that's limited to 5 to 1 leverage instead of 500 to 1, or 100 to 1, or something.

Andy: Absolutely. And fully transparent between counterparties, so that one can track the entire chain of those transactions and see that you're not got any mismatches, duration, mismatches, or any of that kind of rubbish that currently, you know, is used.

Craig: Andy, following up with that, leads us to question number five. Abuses of the current system. "Do you have any updates on the RICO prosecutions at JP Morgan?"

Andy: Yeah, and I think it's best fully answered by JPM, JP Morgan's actions around its embezzled physical silver position, and, where we were led to believe that they were unloading hundreds of tons of their ill-gotten haul just before they knew the silver price was gonna blow higher, how JP Morgan got the Department of Justice monkey off their back, while actually profiting from a 30 cent EFP arbitrage window. And actually, if you look at the EFP situation right now, you're looking at 38 cents, 40 cents. I mean, ludicrous on a contract that's already rolled off the board, but really to answer the questions, as you say, JP Morgan's under investigations.

And we know that the DOJ is posturing to settle the RICO case against them with massive fines, and possibly, possibly, some minimal jail time for one or two of the actors. Look, but it's unlikely the CEO and any board-level traders are gonna be jailed for this. But ahead of the fines being issued... And this just illustrates, this illustrates two things going on. There is something going on that's imminent, but they're also finding a way in their own immutable fashion to profit from this. But, you know, to extricate themselves from this illegally accrued physical position, the first thing that they had been ordered to do, and I can attest to this, is to get their position limits back in line with the CFTC agreed levels.

Now, unloading and selling close to 6,000 lots on the first of July 1st notice day, sorry, July 1st, which was the July contract first notice day, the DOJ got off their back, but the footprints confirm that this criminal enterprise found a way to actually profit, while selling the bullion back to themselves, holding all the remaining open interest after first notice day, they still controlled the unregulated leg of this extremely divergent, these EFP spreads. So we were dealing with 930 tons here of wholesale bars. I mean, this is a mind-boggling, staggering quantity of physical bars that were being flywheeled into their own account, over-the-counter market account. And so, not only did they pocket likely $9 million in arbitrage brackets, but they didn't give up a single ounce. So, you know, yeah. So yes, prosecutions are imminent, but to sidestep massive class-action suits that will follow against this taxpayer-funded too-big-to-fail bank, I see this announcement as being timed along with a market reset.

Craig: So, Andy, and just to clarify, would you expect more of these shenanigans in September with the next COMEX delivery month of silver?

Andy: I see their position limits are having to be squared up. In other words, I mean, let's face it, they can still control some client accounts, and combine their trading tactics with a client account. But essentially, they themselves are restricted to 6,000 contracts, as we know. And they still have in excess of that. So yes, I think we'll see another "delivery." And it'll be... And as you can see, these EFP spreads are not closing at all in silver. So they will profit yet again. And then... I mean, let's face it, I mean, as I started by saying, why would you sell all your silver that you've over the years have accrued at 17.5 bucks, when you knew that you were headed into at least the 21.5 to 30 level before you'd even have to blink. And how quick was that?

Craig: Right. So in your view, they're just simply making it appear to the DOJ that they are fixing things, when really, it's all smoke and mirrors. They're still holding all the silver?

Andy: Yeah, but I mean, the DOJ doesn't care. They want to square the position. So you've been told to get rid of those COMEX positions. What you do with them, there's nothing illegal. Yes, it is. It should not be legal, but there's your answer. It's off the board. It's away from the COMEX. They're settling claims that come through and you say, "Yeah, we did. We got them to reduce that. Here, we're in line now with the CFTC. We're in line with everything," and now, smack on the wrist time.

Craig: Okay, Andy, that leads us, I think, to question six, because you mentioned in your last answer about the shortages at the wholesale level, the question six is that "There are reports of silver being in short supply at that wholesale level. Can you speak to this?"

Andy: Hundred percent. We are definitely experiencing restrictions in supply, as well as extremely large wait times for wholesale silver. Now, we're not talking about kilo bars here, where we've got refiner delays that are, in fact, months out. In fact, we were told, they're so busy producing gold bars at this point that they're shoving this, all the silver processing, even further out. So, you know, six weeks has turned into months now.

But we're not talking about kilo bars here, because we're talking about the wholesale market. And I often have people say to me, "Look, how can I not get this fulfilled? How can you not fulfill me on all these thousand-ounce bars that I've ordered?" [inaudible 00:18:58] and they say, "Well look, you know, surely a bullion bank, if you go to a bullion bank, and they're in the business to sell something," people scratch their head. And they don't... Unless you've actually been in this business enough to know that there isn't any, and we try and explain, and they say, "But that's not possible. It's not possible, you know, that it could function this way." And it's difficult, and especially when they listen to the industry apologists saying, "Oh, there's plenty of thousand-ounce wholesale bars. They're in an ample supply." I mean, this is so off base, it's laughable. So yes, we are experiencing very large delays. Not only that, when we do get deliveries, that we're finding the bar numbers and, in fact, the last list, and this is a whole different subject, and I perhaps should talk about this another time, but we just received some bars from JP Morgan, and not a single, single bar list number was correct on this entire shipment of thousand-ounce bars, starts to throw into question an awful lot of things. How's that possible?

Craig: Yeah. Again, for a market that lives off of flow, really, it sounds like they're having some flow issues.

Andy: Huge time. And, you know, I'd love to expand, but I know that we have to keep things moving along.

Craig: Well, it's good to know. All right, lastly then, to our final question, "What large PM market developments are you most confident will take place either later this year or next?"

Andy: Right. Well, I think the biggest, and the thing that comes to mind, what will it take to blow gold and silver through historically anchored resistances? And I think a lot of people are still thinking in technical terms when they should not be. Really, I'm talking about the upcoming reset. The paper to physical reset is at last beginning to go mainstream. I mean, we're seeing now even mainstream talking about this kind of stuff. So, after this week's short squeeze, last week's, this week's, especially what we're seeing since Monday and today, these calls for a revaluation are getting the attention of the technical short sellers, who have until recently enjoyed sufficient COMEX-centric position concentration tailwinds to be able to ignore rea supply-demand imbalances.

So, these unwanted observations also have the attention of the bullion banks exposed to very large offside delivery obligations. However, this is where it gets really interesting. There is a split that's developed within the first-tier banks, market-making gold and old guard cabal, which is kind of what we were talking about a minute ago with the LME. But as we've discussed many times over the last two years, we've already been evidencing Goldman breaking rank and going long gold, long physical gold, for their own physical book, while the likes of the Fed, the agent primary dealer banks, that short on the paper side of these competing Goldman Sachs accumulations. And we're seeing this battle underway.

And given Goldman's footprints, we can also be sure that the Bank of England, and the Treasury, are gearing up for a physical upside revaluation. Goldman does not get it wrong. This vampire squid's tentacles are deeply embedded inside the entire central bank network. And, of course, the BIS. Can you think of a single central bank banker who's not an ex-Goldman alumni? I mean, this is... And all I will say, this is an unprecedently bullish setup for gold and silver investors. And, you know, Craig, I know that we try to limit these things to 20 minutes, so I'd love to expand more. Perhaps we'll do it on your website one day.

Craig: Well, yeah. There's so much more to unpack there. But you had mentioned earlier that you thought this gold/silver ratio coming down was going to be a part of this reset, as you call it, in terms of the paper derivative pricing scheme. Would that be a good way to lead that off?

Andy: Yeah, it certainly would. And this split, I think, really, where we're seeing this divergence, this split between the first-tier banks, it's no longer a homogenized cabal of bankers. They've all got different agendas. And clearly, every central banker now knows that you better be on the right side of a gold revaluation. It's impossible to hold gold down at these kind of levels. So, you need to square things up pretty rapidly. And I think we're seeing that also with the way the DOJ is dealing with JP Morgan. I think we're gonna see, you know, this is taxpayer funded too-big-to-fail banks. You know, they need to be squared off. There could be massive class action suits coming out that could completely take these banks out.

And so I think, yeah, we're gonna see a well-coordinated, but I think this year, this year, it's gonna happen. I think it's not gonna be too far away. I think you cannot hold... I think, where do I think this level is gonna react? Probably $2,500 gold. At that point there, you need to have a paper market reset, because there's too much unencumbered, or too much encumbered, rehypothecated gold in the system. And it simply is... You cannot square it other than... And bear in mind there is plenty of unallocated contracts out there, LBMA contracts, that could be easily, legitimately squared for cash. I actually think that the COMEX is not gonna actually default.

Craig: They'll instead, just what, transition away?

Andy: Yeah, I think that what's gonna happen is that you cannot possibly... In the sense, you could have a force majeure. Yes, you could. But the thing is, that would affect the CME's, all their other businesses. I think what we'll see is the reset will happen in the over-the-counter markets. Basically, it's FX gold, foreign exchange gold is, you cannot default on a foreign exchange contract. I think what will happen is that there'll be a settlement. All the right guys will be on the right side of the over-the-counter market when it settles. And you'll be able to square up and allow the COMEX price to rise up with it. So I don't see... Many people say a force majeure is gonna completely shut down the COMEX. I actually think it actually may not hit...that it's gonna be settled in the much larger over-the-counter markets.

Craig: And then they play along, and volume maybe transitions away to other exchanges. And...

Andy: Yeah.

Craig: Okay.

Andy: It's gone. It's finished. I see RIP COMEX Gold. I think, you know, but I don't see the default. I don't see them daring to default the entire... What about the oil contracts? What about every other contract? You can't. You've lost so much credibility as it is. Sometimes it's better to step away and concentrate on other things. And I think the gold market's got away from them.

Craig: Either way, you've made a pretty compelling case for higher prices, Andy, and you throw that on with QE unlimited, and infinite QE around the world, negative real interest rates, and then what you've just discussed. I think, again, you've made a pretty compelling case that we should be expecting higher prices. And to that end, of course, Sprott Money is your most trusted source for not only buying precious metals, but also storing precious metals. We can help you to expand your stack, or get you started with your own stack from scratch. Again, go to sprottmoney.com, or just give us a call at 888-861-0775. We've been talking to Andrew Maguire here with "Ask the Expert" here in July. Fabulous conversation, Andy. Very much appreciated. Thank you so much for your time.

Andy: My pleasure, Craig.

Craig: And from all of us at Sprott Money News at sprottmoney.com, thank you for listening. We'll have another "Ask the Expert" segment next month.